CF Industries: Near-Term Challenges, Long-Term Potential

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CF Industries: Near-Term Challenges, Long-Term Potential

Oct. 29, 2014 1:53 PM ET  |  1 comment  |  About: CF Industries Holdings, Inc. (CF), Includes: YARIY

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More...)

Summary

• CF’s merger with Yara was never a merger of equals.
• Now that merger talks are off, equity market can return to core CF investment case.
• CF is taking a number of investor friendly actions but lower grain prices a near-term challenge.

CF Industries (NYSE:CF) is a leading low cost producer of North American nitrogen from cost advantaged U.S. shale gas. The company has been taking a number of actions to increase value for shareholders, including deploying more capital to shareholders through a higher dividend and stock buybacks, locking in mid-teens returns through long-term supply agreements, selling phosphate assets, and positioning the company to benefit as a first mover in new capacity in 2015/16. However, despite of these shareholder friendly measures the company continues to face challenges in the near-term in the form of lower grain prices.

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It Was Never "A Merger of Equals" With Yara

Mostly recently the company had entered into talks with Norway's Yara International (OTCPK:YARIY) about potential merger of equals. While both the companies have terminated the merger talks now, it was not a merger of equals to begin with given the disproportionate degree of benefits Yara would have received from merging with CF. If both companies had merged Yara would have gained substantially low priced North American feedstock benefits plus a greater degree of UAN and ammonia exposure.

CF on the other hand would have benefited from Yara's global downstream sales & marketing business, as well greater scale in specialty nitrogen products. While the merger would have combined the world's two largest nitrogen producers, with a combined market share of 8%-9% globally, it was surprising that CF was even entertaining a merger of equals with Yara given that the company is well-positioned to harness cheap U.S. natural gas. From CF's perspective, the merger would have increased exposure to higher-cost European natural gas and away from its advantaged access to U.S. shale gas. Moreover, CF is buying back its own stock aggressively, just before its new plans start-up in late 2015-16.

Among The First To Bring Online New Capacity

CF Industries is ahead of its peers in nitrogen capacity expansion projects. The company will be among the first and certainly among the largest to bring online new nitrogen capacity in North America when its plants at Donaldsonville and Port Neal start-up in late 2015 and mid-2016, respectively. CF is adding 2.1 million tons of new gross ammonia capacity, much of which will be able to be upgraded into urea or UAN. Based on current prices, these two projects could add up to $700 million of EBITDA on an annual, when both these projects are fully operational in 2017.

While CF Industries is among the first, it is certainly not the only company coming up with expansion projects, rest of the industry is also catching up. At least 25 new ammonia projects have been announced which could be built by 2020. Almost half of these projects, including 5 greenfield projects, would have either received a final investment decision or will be under construction by the end of 2014.

While CF is well positioned with two big expansion projects coming online in 2015 and 2016, which have the potential to contribute significantly to EBITDA and earnings per share, but the company continues to face challenges in the near-term in the form of lower grain prices. In the near-term, urea and UAN prices are bouncing along the bottom. Urea, in particular, is likely to remain range bound with the floor defined by the high-cost marginal exporters in China. The need of importers like the U.S. to attract imports at premium prices determine the urea price ceiling but as the new capacity starts up that premium is likely to narrow.

恒一

NG_NM

恒一 发表于 2014-11-22 12:03 PM